Financial Structure

For specificity, consider a fresh loan of $A which matures in period T. Scheduled repayments are S1, S2, … ST. Consider the specific example of an IDA (International Development Association) loan, where, typically T = 40 and

We consider schemes which substitute a revised payment schedule R1, R2, … RT which have the same value to the creditor but which are easier for the debtor to pay. The constant value constraint implies

where F = 1 is the discount factor and H = 40 is a sufficiently long horizon¹⁰. The schemes we consider therefore operate by advancing and postponing debt service payments.

10 We need to allow for the possibility that postponed payments late in the life of a loan might force extension of the loan maturity.

By Prof. Christopher L. Gilbert, Prof. Alexandra Tabova